OverDrive, the largest commercial provider of ebooks and other digital content to libraries, issued a surprise announcement on December 24 about a pending change in its ownership. The company's current owner Rakuten—a Japanese online retailing company—has entered a definitive agreement to sell OverDrive to KKR, a major US-based investment firm. This news on the digital lending front has sparked considerable interest and raised numerous questions from the library community.
OverDrive holds the dominant market share as the leading provider of digital content to libraries, with more than 43,000 libraries subscribing to its content lending platform. The OverDrive catalog currently offers 4.5 million books and audiobooks from more than 25,000 publishers. More than 95% of public libraries in the US and Canada rely on it for digital lending and other services. Though public libraries represent the largest portion of OverDrive's customers, the company also works with schools and corporate libraries. Libby, an app introduced in 2017, enables patrons to search, check out, and read ebooks and audiobooks that their library has acquired.
A short-lived relationship
Rakuten, a large multinational conglomerate based in Tokyo, acquired OverDrive in March 2015 through its subsidiary Rakuten USA in a transaction valued at $410 million. Its digital content portfolio also includes Rakuten TV, Viki, and the Kobo platform for ebooks and audiobooks. OverDrive's position in library lending complemented Toronto-based Kobo's focus on e-readers and content for the consumer market.
Founded in 1997, Rakuten employs more than 17,000 personnel in 30 countries and has an annual revenue exceeding $10 billion. The company's 2018 annual report emphasized the company's expansion as a telecommunications provider in Japan, working toward a fully cloud-based 5G mobile network. Within a company mostly focused on consumer-facing technologies and services, OverDrive was the company's only library-oriented business.
The acquisition by Rakuten was a “strategic investment,” in which a company is acquired by a larger entity with related business interests, usually with the expectation that new synergies or efficiencies will ensue. Strategic investments are usually long term, with the acquired company integrating into the business and technical infrastructure of the acquiring organization. Within the library industry, companies like EBSCO Information Services and ProQuest periodically make strategic acquisitions and rarely sell off their portfolio companies.
The divestment of OverDrive after less than five years implies that Rakuten was not able to achieve those expected synergies. Considering Rakuten's large size and its broader business strategies that target consumers, OverDrive for libraries may not have been a comfortable long-term fit.
Although no longer under common ownership status, the interoperability and partnerships between Kobo and OverDrive will likely persist.
Pending sale to KKR
After the transaction closes in the first quarter of 2020, KKR will assume ownership of OverDrive. CEO Steve Potash will continue to lead the company. Although the announcement did not disclose any details of the transaction, a value of about $775 million can be inferred by combining the $410 million that Rakuten paid in 2015 with the $365.6 million profit Rakuten reported on this investment.
This time, the acquisition of OverDrive is a “financial investment,” in which the buyer, usually a private equity firm or other financial sponsor, expects to increase the value of the company over the short term, typically five to seven years. Financial investments by private equity firms typically take the form of leveraged buyouts, where the buyer contributes only a portion of the purchase price and secures loans from investment banks to meet the full amount negotiated with the seller. Financial buyers control the business strategies and operations of their portfolio companies via placement of representatives on their board of directors, usually in proportion to their ownership stake. The company itself is saddled with paying off the debts, but these transactions provide the company with new capital to fund business expansion and product development.
With assets of $208.4 billion, KKR has a diverse portfolio of companies that span many industries. Both KKR and Rakuten have wide-ranging investments, including some in common. Rakuten is an investor in ride-sharing company Lyft, holding an 11% stake and reporting a $947 million loss on that investment in November. KKR also made a substantial investment in Lyft in April 2017.
KKR also owns RBmedia, one of the major suppliers of audiobooks to libraries. In a transaction announced in July 2018, KKR acquired RBmedia from Shamrock Capital Advisors. As with OverDrive, this investment was made through its KKR Americas XII Fund. KKR's investments in RBmedia and OverDrive were shepherded by Richard Sarnoff, a veteran of the publishing industry and chairman of media, entertainment, and education for KKR.
RBmedia offers a subscription service for consumers in addition to its library lending platform. The company, at the time known as Recorded Books, was acquired by Shamrock in August 2015. The previous month, Recorded Books acquired competing audiobook publisher Tantor Media and in May 2014 it acquired HighBridge Audio, partially consolidating the digital audiobook industry.
Will OverDrive and RBmedia merge? Such a union would signal a major consolidation in the digital content industry for libraries and schools.
The digital lending arena will continue to see commercial and nonprofit competition. Other players in the sector—such as bibliotheca's cloudLibrary, ODILO, Baker & Taylor's Axis 360, and Hoopla—represent significant competition, though a possible merger would shift industry dynamics substantially. A nonprofit alternative for library ebook and audiobook lending is available based on the Library Simplified initiative, the open source SimplyE software developed by New York Public Library, and the Digital Public Library of America's Exchange ebook marketplace.
The possibility of consolidation remains anyone's guess, especially since the OverDrive deal has not yet closed. Within the library technology industry, Golden Gate Capital owned both Ex Libris and Infor Library Systems and did not merge them. In this case, the two companies have been acquired through the same investment fund, which at the very least would likely mean common strategic leadership at the board level.
Library lending in a field of giants
Ebook lending occurs within a highly consolidated publishing industry dominated by the Big Five and Amazon. Some of these corporate forces perceive library lending as intrusive and are not motivated to offer favorable licensing terms. Pricing models that place restrictions on the number of copies available for lending, the number of circulations allowed before the title must be relicensed, and temporary embargos on front-list titles present significant challenges for libraries. OverDrive's dominant market share in this area could add substantial clout to library interests in negotiating more favorable pricing and terms.
OverDrive often takes the blame for unfavorable licensing terms, but the company has a strong record of advocating for library interests. In October, for example, OverDrive CEO Potash spoke in front of the UK House of Lords and presented evidence on how libraries make a positive impact on their communities and require more sustainable funding. OverDrive provided funding for the independent Panorama Project to study “data-informed insights on public libraries and their impact on book discovery, author brand development, and sales.”
Impact on the library community
KKR's Christmas Eve announcement sounded many alarm bells in the library community. Concerns include the negative impact of private equity ownership and industry consolidation. KKR's involvement with Toys “R” Us and its ultimate demise is one example. While private equity ownership comes with substantial financial overhead, it can also offer important benefits. The failure of a bricks-and-mortar retail chain in the context of massive online competition is not a fair comparison to library digital lending in a phase of sustained growth.
Another factor is that OverDrive was controlled by private equity prior to its tenure with Rakuten. Insight Venture Partners made a significant investment in OverDrive in October 2010. At that time, two representatives from the investment firm joined OverDrive's board of directors. This ownership arrangement continued through March 2015, when the company was sold to Rakuten.
The possibility of a merger between OverDrive and RBmedia into a new superpower is a more valid concern. In sectors involving the sale of products and services, fewer competitors lead to higher consumer prices. But in an arena where pricing is controlled more by publishers than distributors, a larger player could optimize library interests in future negotiations of prices and lending terms.
Consolidation of an industry can create opportunities for development and innovation at a level not possible with multiple small companies. Infusions of capital can lead to new products, services, and technologies. For libraries, much is at stake.
Continuity in leadership is also an important factor. Potash's ongoing involvement should be taken as a positive note. He emphasizes that regardless of ownership arrangements, OverDrive will continue to perform as a mission-based company supporting libraries and promoting reading and literacy in the broader society. Potash cites the company's Certified B Corporation status as a reflection of the values under which OverDrive operates.
Overall, the pending business transition sets the stage for the next phase of the library digital lending environment. As library investments in digital content continue to rise and spending on print stagnates or falls, the dynamics of this sector bring high-stakes ramifications for public libraries. At this point, the takeover cannot be characterized either positively or negatively. Within a complex set of dynamics where libraries, patrons, and publishers are constantly interacting, the success of libraries increasingly depends on finding the best course for digital lending.